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Price Guarantees in Dynamic Pricing and Revenue Management

Author

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  • Yuri Levin

    (School of Business, Queen’s University, Kingston, Ontario, Canada K7L 3N6)

  • Jeff McGill

    (School of Business, Queen’s University, Kingston, Ontario, Canada K7L 3N6)

  • Mikhail Nediak

    (School of Business, Queen’s University, Kingston, Ontario, Canada K7L 3N6)

Abstract

We present a new model for revenue management of product sales that incorporates both dynamic pricing and a price guarantee. The guarantee provides customers with compensation if, prior to a fixed future date, the price of the product drops below a level specified at the time of purchase. We consider the problem of simultaneously determining optimal dynamic price and guarantee policies for items from a fixed stock when demand depends both on the price and on the parameters of the price guarantee. The model can be used for pricing any items with limited availability over a fixed time horizon. We formulate this model as a discrete-time optimal control problem, prove the existence of its optimal solution, explore some of the structural properties of the solution, present lower-bounding heuristics for solving the problem, and report numerical results.

Suggested Citation

  • Yuri Levin & Jeff McGill & Mikhail Nediak, 2007. "Price Guarantees in Dynamic Pricing and Revenue Management," Operations Research, INFORMS, vol. 55(1), pages 75-97, February.
    • Handle: RePEc:inm:oropre:v:55:y:2007:i:1:p:75-97
    DOI: 10.1287/opre.1060.0344
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    References listed on IDEAS

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    Cited by:

    1. Tingliang Huang & Zhe Yin & Ying-Ju Chen, 2017. "Managing Posterior Price Matching: The Role of Customer Boundedly Rational Expectations," Manufacturing & Service Operations Management, INFORMS, vol. 19(3), pages 385-402, July.
    2. Nikolay Osadchiy & Gustavo Vulcano, 2010. "Selling with Binding Reservations in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 56(12), pages 2173-2190, December.
    3. Chen, Ming & Chen, Zhi-Long, 2024. "Stop clicking around and book direct: Impact of best rate guarantee on hotel pricing," European Journal of Operational Research, Elsevier, vol. 313(3), pages 1088-1104.
    4. Kimitoshi Sato, 2021. "Dynamic pricing with automated purchase-reservation algorithms," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 20(1), pages 33-41, February.
    5. Masiero, Lorenzo & Viglia, Giampaolo & Nieto-Garcia, Marta, 2020. "Strategic consumer behavior in online hotel booking," Annals of Tourism Research, Elsevier, vol. 83(C).
    6. Zhan Pang & Wenqiang Xiao & Xuying Zhao, 2021. "Preorder Price Guarantee in e-Commerce," Manufacturing & Service Operations Management, INFORMS, vol. 23(1), pages 123-138, 1-2.
    7. Huang, Kwei-Long & Kuo, Chia-Wei & Shih, Han-Ju, 2017. "Advance selling with freebies and limited production capacity," Omega, Elsevier, vol. 73(C), pages 18-28.
    8. Yuri Levin & Jeff McGill & Mikhail Nediak, 2008. "Risk in Revenue Management and Dynamic Pricing," Operations Research, INFORMS, vol. 56(2), pages 326-343, April.
    9. Cohen-Vernik, Dinah & Pazgal, Amit, 2017. "Price Adjustment Policy with Partial Refunds," Journal of Retailing, Elsevier, vol. 93(4), pages 507-526.
    10. Wei, Jie & Chang, Meijing, 2023. "Are price matching and logistics service enhancement always effective strategies for improving profitability?," European Journal of Operational Research, Elsevier, vol. 307(1), pages 103-115.
    11. Yuqun Dong & Yaming Zhuang, 2023. "Research on an Investment Decision Model of Waste Incineration Power under Demand Guarantee Policies," Sustainability, MDPI, vol. 15(15), pages 1-19, July.
    12. Xing Hu & Zhixi Wan & Nagesh N. Murthy, 2019. "Dynamic Pricing of Limited Inventories with Product Returns," Manufacturing & Service Operations Management, INFORMS, vol. 21(3), pages 501-518, July.
    13. Chen, Ming & Chen, Zhi-Long, 2019. "Uncertain about your travel plan? Lock it and decide later: Dynamic pricing with a fare-lock option," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 125(C), pages 1-26.
    14. Arcan Nalca & Tamer Boyaci & Saibal Ray, 2013. "Competitive Price-Matching Guarantees: Equilibrium Analysis of the Availability Verification Clause Under Demand Uncertainty," Management Science, INFORMS, vol. 59(4), pages 971-986, April.
    15. Han Wang & Damien Fay & Kenneth N. Brown & Liam Kilmartin, 2016. "Modelling revenue generation in a dynamically priced mobile telephony service," Telecommunication Systems: Modelling, Analysis, Design and Management, Springer, vol. 62(4), pages 711-734, August.
    16. Cuihong Li & Fuqiang Zhang, 2013. "Advance Demand Information, Price Discrimination, and Preorder Strategies," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 57-71, September.
    17. Ling Zhao & Anquan Zou & Pin Zhou, 2023. "E‐retailer's dynamic inventory and pricing policy with price‐protection services," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 490-501, January.
    18. Weaver, Robert D. & Moon, Yongma, 2011. "Pricing Perishables," 2011 International European Forum, February 14-18, 2011, Innsbruck-Igls, Austria 122007, International European Forum on System Dynamics and Innovation in Food Networks.
    19. Hong Zheng & Lin Tian & Guo Li, 2023. "A bane or a boon? Profit‐margin‐guarantee contract in a channel with downstream competition," Production and Operations Management, Production and Operations Management Society, vol. 32(7), pages 2087-2100, July.
    20. Chen, Pingping & Zhao, Ruiqing & Yan, Yingchen & Zhou, Chi, 2021. "Promoting end-of-season product through online channel in an uncertain market," European Journal of Operational Research, Elsevier, vol. 295(3), pages 935-948.
    21. Guoming Lai & Laurens G. Debo & Katia Sycara, 2010. "Buy Now and Match Later: Impact of Posterior Price Matching on Profit with Strategic Consumers," Manufacturing & Service Operations Management, INFORMS, vol. 12(1), pages 33-55, December.
    22. Du, Jie & Zhang, Juliang & Hua, Guowei, 2015. "Pricing and inventory management in the presence of strategic customers with risk preference and decreasing value," International Journal of Production Economics, Elsevier, vol. 164(C), pages 160-166.
    23. Ting-Chen Hu & Kuo-Chen Hung & Kuo-Lung Yang, 2019. "The Convergence of Gallego’s Iterative Method for Distribution-Free Inventory Models," Mathematics, MDPI, vol. 7(5), pages 1-10, May.

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